Making Tax Digital for income tax in the UK

Abstract

Since 2015, Making Tax Digital (MTD) has been a fundamental part of the UK government's plan to further digitalise the UK tax system, with the aim being to create "a trusted, modern tax system – one that fits with how customers live their lives and run their businesses, keeps the tax gap low, and helps to create the right conditions for UK economic growth". THE ORIGINAL PLAN After the project was announced in Budget 2015, HMRC subsequently launched the roadmap for MTD in December 2015 with the stated aim of digitalising and modernising reporting and record-keeping for Value-Added Tax (VAT), income tax, and corporation tax by 2020. A quarterly return will be required for each business operated by the taxpayer * Submit an End of Period Statement (EOPS) on which tax and accounting adjustments will be made to the quarterly update figures previously submitted (this has since been removed as a result of the Small Business Review in 2023) * Submit a final declaration finalising the taxpayer's position in respect of all business/property income reported via MTD, in addition to including all other sources of taxable income and making any tax adjustments, including allowances/reliefs. The following package of changes was also announced: * For all taxpayers providing quarterly updates: * Taxpayers will report cumulative tax year-to-date figures in each quarterly update and not just the figures for the quarter, removing the need to resubmit previous updates for corrections, and * Three-line accounts (turnover, expenses, and net profit) can be used if annual turnover is below the VAT registration threshold (increased to £88 000 from 1 April 2024). * Landlords with jointly owned property will only need to report gross income in quarterly updates; expenses will only be needed in the final declaration.

Headnote

Since 2015, Making Tax Digital (MTD) has been a fundamental part of the UK government's plan to further digitalise the UK tax system, with the aim being to create "a trusted, modern tax system – one that fits with how customers live their lives and run their businesses, keeps the tax gap low, and helps to create the right conditions for UK economic growth". Former Chancellor George Osborne referred to this "as the death of the annual tax return" when the project was first announced in the 2015 Budget.

Sounds like a great idea, right? Unfortunately, that is not the view of many professional bodies, tax agents, self-employed individuals, and landlords. Many are fearful of these significant changes and simply don't believe that they will ever come to fruition after repeated delays and the high chance of a change in government in the UK this year. Whilst there is no doubt that many businesses are becoming increasingly digitalised, the costs and upheaval that will be imposed by MTD for Income tax Self-Assessment (MTD for ITSA) are simply not welcome.

However, announcements made in the 2023 Autumn Statement confirmed that His Majesty's Revenue and Customs (HMRC) is moving ahead with its plans for MTD for ITSA and essentially reiterated that it will commence in April 2026. Some relaxations to the original design were also announced.

Let's look at the journey of MTD for ITSA so far to set the Autumn Statement announcements in context.

THE ORIGINAL PLAN

After the project was announced in Budget 2015, HMRC subsequently launched the roadmap for MTD in December 2015 with the stated aim of digitalising and modernising reporting and record-keeping for Value-Added Tax (VAT), income tax, and corporation tax by 2020. This was followed by several consultations and various delays before the first major phase of MTD was introduced for VAT for those with taxable turnover above the (then) £85 000 VAT registration threshold. MTD for VAT was then extended to all VAT-registered businesses from April 2022 after a further delay due to the pandemic.

However, MTD for ITSA is much more complex than VAT due to the wider range of taxpayer circumstances, but also because of the complexity of UK income tax legislation. Broadly, MTD for ITSA will replace the self-assessment tax return for many self-employed individuals and landlords (partnerships will be brought in later). Instead, compatible software will need to be used to −

* Submit quarterly returns to HMRC containing details of business income and expenses for each quarter (no tax or accounting adjustments will be made to these figures). A quarterly return will be required for each business operated by the taxpayer

* Submit an End of Period Statement (EOPS) on which tax and accounting adjustments will be made to the quarterly update figures previously submitted (this has since been removed as a result of the Small Business Review in 2023)

* Submit a final declaration finalising the taxpayer's position in respect of all business/property income reported via MTD, in addition to including all other sources of taxable income and making any tax adjustments, including allowances/reliefs. The final declaration for each tax year will be due by the normal 31 January self-assessment filing deadline after the end of the tax year, and

* Keep digital records of all transactions The existing system of how self-employed businesses and landlords pay their taxes will remain unchanged. MTD for ITSA therefore heavily relies on taxpayers using MTD-compatible software to keep their records and submit returns to HMRC via an application programming interface or API, essentially a piece of software that allows two different computer systems to interact with one another.

CHANGES TO THE PLAN

MTD for ISTA was originally due to start in 2018 but was delayed several times. In December 2022, the government announced the current mandatory dates − unincorporated businesses and landlords with an annual income of over £50 000 must join from 6 April 2026, followed by those with income over £30 000 from 6 April 2027.

The reason for this eight-year delay is multifactorial; in part it is due to HMRC underestimating the challenge of digitalising the tax system for income tax and setting overly ambitious targets. External factors such as a challenging delivery environment after the UK's exit from the European Union (EU) and resource pressures due to the pandemic and the cost-of-living crisis also played a part.

Recently, the UK's Public Accounts Committee (PAC) was critical of the spiralling costs and accused HMRC of losing sight of the need to put taxpayers at the heart of changes to the UK tax system. Ironically, the PAC also noted its concern that HMRC is succeeding in 'making tax difficult'.

THE SMALL BUSINESS REVIEW

In December 2022, the government announced a review into the impact of MTD for ITSA on the smallest businesses. The Small Business Review investigated whether businesses and landlords with income below £30 000 should be brought within MTD for ITSA and how it could be shaped for them. It also considered how processes could be streamlined to minimise their burden for all users. The outcome of this was announced in the 2023 Autumn Statement.

The headline announcement said that MTD for ITSA will not be extended to landlords and sole traders with income under £30 000 'for the time being'. The government has, however, stated that it would keep the decision under review.

The following package of changes was also announced:

* For all taxpayers providing quarterly updates:

* Taxpayers will report cumulative tax year-to-date figures in each quarterly update and not just the figures for the quarter, removing the need to resubmit previous updates for corrections, and

* Three-line accounts (turnover, expenses, and net profit) can be used if annual turnover is below the VAT registration threshold (increased to £88 000 from 1 April 2024).

* Landlords with jointly owned property will only need to report gross income in quarterly updates; expenses will only be needed in the final declaration. Less detailed digital records will also be required.

* The EOPS has been removed as it was considered an unnecessary complexity.

* Specific exemptions were introduced for those unable to get a national insurance number as well as for foster carers, and

* MTD for ITSA will be able to accommodate multiple agent scenarios. LEGISLATION AND NEXT STEPS In early December 2023, HMRC published draft legislation for consultation. Following this, The Income Tax (Digital Requirements) (Amendment) Regulations 2024 have now been laid which, alongside the earlier regulations which they amended, set out the requirements which must be complied with. Note that the deadline for submitting quarterly MTD for ITSA returns will now be the seventh day instead of the fifth of the month after the relevant tax quarter end, amended to align with the VAT return filing deadline for those within VAT Stagger 1.

An update notice has also been published which sets out the information which will need to be sent quarterly using MTD-compatible software, the detail of which depends on the relevant person's business.

HMRC are also due to publish a software and information notice for joint property owners, alongside detailed guidance by the end of June 2024. At the time of writing, more detailed information is also awaited on digital record keeping and digital links. MTD TRIAL

HMRC's aim in 2024/25 is to expand its MTD for the ITSA trial by encouraging agents to consider which clients can sign up and then sign them up to participate in the expanded private beta testing trial which commenced from the end of April 2024.

However, at the time of writing, a very limited number of software packages were available to participate in the trial with just five vendors, although many are in development some of which may become available during 2024/25. Agents should therefore carefully consider the advantages and disadvantages of signing up clients to participate.

HMRC has also published detailed guidance in respect of the specific penalty regime which will apply when trial participants testing MTD for ITSA make late submissions. These penalties only apply during the testing phase and must be agreed to before a taxpayer can be signed up to participate in the trial.

CONCLUSION

Whilst the recent changes are largely welcome, many concerns remain unaddressed. However, it would be sensible for agents and businesses affected to begin preparations where this will require significant changes, especially for those still keeping paper records.

That said, without detailed practical guidance, many will be faced with questions and uncertainty when trying to map out what operating within MTD for ITSA will look like. And those who do endeavour to be proactive may end up frustrated.

For now, know that it is still happening, consider if it will affect you/your clients and keep yourself informed. Let's hope that much-needed guidance and clarity will be published soon to allow more taxpayers to join the expanded trial and begin to make this potentially daunting task more achievable.